Unfair contract terms
Under the ACL, a term of a ‘standard form consumer contract’ has no effect at law if the term is unfair.
Standard form consumer contracts are used widely by businesses as a cost effective way to set out the key terms and conditions for providing a product or service. However, businesses need to bear in mind some key obligations when preparing standard form consumer contracts, to avoid unfair contract terms.
A court may determine that a term of a standard form consumer contract is unfair and therefore void. Importantly, the contract itself remains binding on the parties to the extent it can operate without the unfair term.
There is a three-step test to determine whether a term is unfair. This includes an assessment of whether the term:
- would cause a significant imbalance in the parties’ rights and obligations
- is reasonably necessary to protect legitimate interests of one of the parties, and
- would cause detriment if applied or relied on.
Examples of terms that may be unfair include those allowing the business to:
- cancel, avoid, renew or limit performance of the contract, vary the terms of the contract, or renew the contract, but not allowing the consumer to do the same
- make the consumer liable for things that would normally be outside the consumer’s control
- prevent the consumer from relying on representations made by the business or its agents
- charge the consumer’s credit card without giving the consumer notice or an opportunity to dispute the charges
- forfeit a security bond for any breach of the contract, that is, even if there is no causal link between the breach and the forfeiture
- avoid liability for negligence
- increase the fees and charges payable without the right for the consumer to terminate (free of any penalty).
When deciding whether a term is unfair, the court must also consider the transparency of the term within the contract, and the contract as a whole.
Example: A fitness company offers 12 month gym memberships to customers who wish to join their gym. These contracts are non-negotiable and offered to every customer who wants to join. The contract stipulates that the company is able to change the weekly rates charged to members at their discretion without justifying or notifying the customers, and without an accompanying right for the customer to end the contract. Such a term is likely to be considered to be unfair and risks being declared void.